September 05, 2005

Katrina's Economic Effects: Much Worse Than 9/11

By Mimikatz

Necessarily, we have all been focused on the almost unimaginable tragedy that unfolded in New Orleans and our Gulf Region. Soon, however, each and every one of us will begin to feel the indirect effects of Katrina. Initially, they will be largely economic. Although the media has so far concentrated on potentially rising fuel costs, there is much, much more to the story.

When the markets closed on Friday, September 2, the Dow was up 50 points for the week, and oil futures, which had peaked at over $70 dollars a barrel on Wednesday, closed thee points lower. It seemed that the markets' collective judgment echoed that of the White House, that Katrina would be at most a minor setback in a robust economy.

There were some ominous signs, however. Coffee futures were up 10 percent and the price of sugar rose, while farmers' prices for corn and soybeans fell, according to the Financial Times. Most discussions of Katrina's economic effects highlighted oil issues. Others made comparisons to the bounceback after 9/11, concluding that we would experience only a short, sharp shock. But commodity price fluctuations point the way to the real story. We are all about to find out what Thomas Jefferson and Andrew Jackson knew almost instinctively: New Orleans may be the most important city in America--and it is now largely under water.

As George Friedman at Stratfor observed, what Jefferson and the new nation acquired in the Louisiana Purchase was not just land, but land that came with its own built-in transportation system, the mighty Mississippi and its many tributaries from the Alleghenies to the Rockies. New Orleans is where it is, and where it must be again, because this is where the Mississippi empties into the Gulf of Mexico, where cargoes that come down from America's heartland can be loaded onto ocean-going vessels for export to Latin America, Europe and all over the world. And imports from Latin America, Africa and many other areas arrive at New Orleans for shipment up river. It is an unparalleled system for moving heavy and bulky cargo, such as steel, lumber and building materials, and agricultural products like wheat, corn and soybeans.

Although New Orleans' economy is but a small fraction of the total US economy, because of its location the Port of South Louisiana, including the Port of New Orleans is the largest port in the United States and the fourth largest in the world. Over half the grains and soybeans exported from the US pass through those ports, and the harvest will begin to peak in about six weeks.

It is unclear at this point how much damage the Port of South Louisiana has suffered. What is clear is that because of new Orleans' role in the economy, like the human tragedy, the economic consequences of Katrina will far exceed those of 9/11. First, per the Washington Post, over 1,000,000 people have lost their jobs, about 600,000 of which were in New Orleans. This is almost three times the job losses estimated from the World Trade Center attacks. But these people have lost not only their jobs but their homes and their communities, and the infrastructure that supported them. The local tax base of large parts of three states has been virtually obliterated at a time when the area needs services on a massive scale.

Second, as noted by Daniel Gross at Slate, the industries most affected by 9/11 were mostly part of the "new economy", chiefly in the financial services sector. They could be relocated or restarted relatively easily. But New Orleans sits at the intersection of the "new" and the "old" economies. It deals in agricultural and other "old" economy commodities, and relies on a complex physical structure of barges and ships, docks and storage and transfer facilities. But it is also, as he points out, a vital link in the "new" economy of dispersed supply lines, "just-in-time" inventories and the infrastructure for the movement of goods over vast distances they entail. And it requires a trained workforce to operate the Port, a workforce which is now dispersed and whose homes and communities are largely under water.

It is uncertain how long the Port will be out of commission, but the director of public policy for the National Corn Growers Association was quoted as saying that "It doesn't look like ocean freight will ship out of that area for some time." Removing wrecked barges and debris is only part of the problem. Restoring the workforce is the other part. Workers need homes and communities, schools and shops. All of that is gone. In such difficult conditions workers can justifiably command a premium, and that adds to costs.

It is likely that imports will be affected less than exports, because ocean traffic can go to other ports like Houston or Atlantic seaboard ports. But even these cannot pick up all of the slack, given the volume of goods that moved through New Orleans. And costs of imported goods will rise. Among the products affected are tropical fruits and coffee, as well as rubber, lumber and building materials. Locally there has also been damage to poultry, cotton and sugar, in addition to oil production and refining. And many components of the now widely dispersed manufacturing process also come through New Orleans. The one thing we can predict is that given the behavior of modern corporations, there will be an effort to find new suppliers and new customers if bottlenecks occur.

They should. If the cost of imports rises and our exports decline, the already huge trade deficit will widen. This, in turn, will cause the dollar to weaken further. Consumers already reeling from high oil prices will find imported goods harder to afford. This has caused some observers to recalculate the chances of a recession. Many effects will be generally inflationary, but the Fed will be reluctant to raise interest rates during the rebuilding process. And the massive cost of rebuilding the Gulf Coast and New Orleans portends difficult times down the road since our national debt is already fast approaching $8 trillion.

On the positive side, rebuilding after natural disasters has generally had a stimulative effect, as would grants to displaced citizens for relocation and rebuilding. But the problems facing the New Orleans area are such that rebuilding will not begin for many months, assuming we can reach some agreement on how to rebuild and how to fund rebuilding.

The prevailing politico-economic philosophy in recent years has told us that we should leave problems to the ever-rational markets to resolve. But Katrina has exposed the fallacy in this thinking. The dispersal of manufacturing has created supply chains and infrastructure that belong to eveyone and no one, what Barry Lynn in "The End of the Line" "our global industrial commons." We failed to understand the importance of New Orleans, and so we failed as a nation to protect it. It is the tragedy of the commons all over again, this time with incalculable human suffering. Katrina has shown us that our economy is more interdependent than it has ever been, and so more vulnerable to shocks.

As the economic consequences of Katrina ripple through the economy, there may be political changes as well. As we decide how to rebuild, we must remember that "the market" will not take care of us because the market really does not care; it has no goals other than those that society creates and enforces through the web of laws and regulations that contain it. We need a society that. through democratic means, using the energy and intelligence of our people, and with respect for science and nature, provides for and protects the common good, our communities, and each and every one of us. Creating that society is now our challenge, and it is the most fitting memorial we could construct to the victims of Hurricane Katrina.

Comments

Thanks for the fine, informative post, Mimikatz.

This:

We failed to understand the importance of New Orleans, and so we failed as a nation to protect it......As the economic consequences of Katrina ripple through the economy, there may be political changes as well. As we decide how to rebuild, we must remember that "the market" will not take care of us because the market really does not care; it has no goals other than those that society creates and enforces through the web of laws and regulations that contain it.

..is what at least I meant when I asserted in the other thread that this event is probably the beginning of the end of the present government. I meant that the present governing ideology is exploded, not that the Dems are necessarily going to take back congress next year, etc. The superstition of Market Worship, wherein the Market is not a subset of Life, but a superset of it - has been horribly, dramatically, undeniably revealed for what it actually is in practice: a bordello. Chaos. Neglect. Arbitrary-ness. Whatever the election results in the near term, the party's over.

Thank you, mimikatz, for this terrific post. (Tho' twinge-inducing for a New York chauvinist -- you mean we may actually not be the most important city in the known world?) The implications haven't even begun to be acknowledged, much less felt; the talking heads I saw today all blithely predicted 9/11 redux. And as many have noted here this past week, all this certainly bodes for major political change, and should indeed mean the death knell for the present governing ideology. But it'll require leaders who recognize and seize the moment.

As I read your piece I kept thinking about the social risk attendent to economic calamity -- in the 30's FDR was the indispensible man, whose combination of vision, optimism and agile pragmatism helped steer us away from the dangerous political extremes so many others fell prey to. If our economic plight gets anywhere near that bad -- and most Americans are accustomed to far greater creature comforts today than they were 80 years ago -- it won't be pretty. And however discredited the school of Norquist, those who subscribe to it also subscribe to the school of Rove, which is well-nigh indistinguishable from the school of Goebbels. The good guys have, as we've all noted, a historic opportunity, and we sorely need them to act; will they finally be ready to?

As to Corn and Soy Shipments -- they can with not all that significant additional cost go by rail to the Great Lakes ports (Duluth-Superiuor for instance) and go out through the seaway.

Of greater importance, if you happen to need gas in Benton County Minnesota (West Central county) by law you will get an 85% to 15% Ethnol mixture which closts about 40 cents per gallon less than the present 3.00 average gallon price for gas. (The County Farmers (0ld Progressive Grange tendency) own their own Ethnol making plant.

I'll agree with jonnybutter, in a way. This may seriously stall globalization. When China and Nigeria realize they're not getting the grain from us they rely on, they'll think twice about selling us their underwear and oil, respectively. (Well, we'll still get the underwear at least!)

Sara: I am certainly no expert, but everything I read suggested that it would not be so easy, given the volumes of produce we are talking about. The problem is corn and soybeans. Wheat is produced further north, I think, and a great deal is now shipped out of Seattle destined for Asia. But if you are shipping to Nigeria or Latin America, it is a long way from the St Lawrence, and that means increased fuel costs at a time when supplies are tight. That is also the problem with trucking.

Rail lines that could take produce to ports like Houston are apparently completely inadequate, and they have already about reached the maximum in size for freight cars, judging by the Union Pacific trains I see here in the Bay Area.

And it is the East and West Coasts, plus the Great Lakes states, who will weather the economic stresses the best. The central Midwest and deep South (plus Texas), not so well.

Sara, Ben Masel is correct; there isn't the capacity to deal with it on the Great Lakes. In the last 10-15 years, the shipping capacity has dwindled, as the need for moving coal and steel has dwindled. Maybe the Canadians have some excess shipping capacity, but there aren't the ships or the sailors still active on the great lakes to handle it. I suppose some of the Merchant Mariners idled out of the deep sea ports--New Orleans most of all--could be put to work on the Great Lakes, but there are really only about two or three American shipping companies still operating on the Lakes, and I don't know that they have the vessels for it.

And if this seems like arcane knowledge that I shouldn't have without talking out my rear end, I'll let you know that I have a background in Great Lakes shipping, so while I'm out of date with the latest developments, I'm fairly sure of what I'm talking about.

assuming we can reach some agreement on how to rebuild and how to fund rebuilding.

I sit here, contemplating the fact that the current estimate for replacement of the San Francisco-Oakland Bay Bridge, proved vulnerable to failure in the 1989 quake, is something like 2012. It is likely that getting the economic life of the New Orleans region going will take less time than this project, but it is going to require political competence. I am not encouraged.

I thought of the Seaway at first myself. And then I started thinking about where on earth the ships would load. I think Duluth is probably about the only American port anywhere on the Great Lakes, and most of its operations are geared for iron ore, not grain or finished goods. There's certainly nothing in the Chicago metro area that I'm familiar with, and I don't remember seeing anything that looked port-like in Detroit, either. That's strike one.

Strike two is that the traffic on the Mississippi is in barges, not boats. Barges work just fine on a placid river. I wouldn't care to try them on any of the Great Lakes when there's any kind of a wind up, and we're coming into fall again. (Anybody besides me got "The Wreck of the Edmund Fitzgerald" running through his head right now?)

Strike three is that, as several other commenters have noted, the ships and the crews are on the Gulf Coast, not the Great Lakes.

It's going to be interesting to see what transpires, but it's not looking good from my perspective.

Duluth is a major shipping port for grain, as are Toledo and the Port of Indiana. But the problem is still the shipping capacity. The ships would either be small (to traverse the St. Lawrence Seaway and the locks at Niagra Falls) or would have to be built within the Great Lakes for the Great Lakes. Most of the big iron ore carriers (which can also carry grain) were built on Lake Erie. Some of them could probably be taken out of drydock, but it's late in the season to get them ready, crew them, and get them up into Lake Superior.

Had this happened a month or two ago, and they could have forseen the shipping problems, they would probably have had time to react. But I think it's too late in the season to get the vessels ready in time to handle the grain.

And now that I think about it, Great Lakes shipping wouldn't really solve the grain problem anyway. The reason grain goes down the Mississippi in barges is typically for transfer to deep sea vessels for transport to Europe, South America or Africa. The Great Lakes grain shipping is mostly to move it within the US, because large vessels can't get through the locks at the Falls.

So for grain bound for overseas shipment, it's either rail to an Atlantic port--and I don't know which port that would be--to Houston/Corpus Christi (which is going to be overwhelmed) or to the Pacific by rail.

And our rail system is at capacity, and not at all agile or responsive due to the consolidation of freight carriers.

And I'd thought about the possibility of using the ore carriers for grain, but figured there were probably just about enough of them to handle the demand for iron, and no more. Those honkin' behemoths can't be cheap to build, and I don't imagine anybody would build extras just on the chance that they might be needed in an emergency.

Mimikatz, thanks for this. Did you come across anything about or do you have any thoughts yourself on ripples into the housing market? I'm an idiot about this stuff, so forgive me if the question reveals my ignorance. But with housing prices already claimed to be in a bubble, your prediction that the cost of building materials will rise, and some million new homeless, I'm trying to figure out how it all will fit together.

Interesting question about housing. The demand for housing will keep strong, but if there is an economic downturn, maybe not so much demand for second homes, which is big in some areas like FL. Also, some may be rethinking homes in the hurricane belt. There probably will be an increase in costs, though. One article I read speculated $10,000 per house. I think interest rates will stay low, but other costs going up will crimp consumers. It would be great if some architects and buliders came together with creative plans for real affordable housing for our displaced citizens.

Oyster (from NO) has a post about a local guy who has pretty good looking modular homes, although I think they might be a little on the expensive side (around $100k - they ought to be more like $60k, probably).